When pension simplification came into effect on 6 April 2006 (A-day), it introduced the concept of the lifetime allowance (LTA).
The LTA was originally set at £1.5m, but this may have been less than the benefits already accrued by some at A-day or their planned retirement date. In order not to disadvantage these people, the government introduced transitional protections that gave a higher or unlimited entitlement to the LTA.
When the LTA began to drop in 2012, further protections were introduced. These protections came with rules that, if broken, make protection invalid. In this case, the client will need to inform HM Revenue & Customs and then revert to the standard LTA or, if applicable, another dormant LTA protection they may also hold. We are now in the position where the standard LTA isn’t applicable for many, and where they are restricted on what they can and can’t do in order to protect themselves from unnecessary LTA charges.
Unfortunately, not all protections have the same rules, and even those that appear similar contain differences that can have a significant effect.
Primary protection helped to protect pension benefits valued in excess of £1.5m at A-day. It was only available to those individuals who had benefits over this level. Individuals were entitled to remain as a member of a pension scheme and to continue to contribute or accrue benefits.
Primary protection can only be lost when there has been a pension debit that, when taken from the original protected amount, brings the fund at 6 April 2006 below £1.5m. The debit figure isn’t adjusted for the time between 2006 and the date of the pension debit. As we get further from 2006, this means it is increasingly likely that the primary protection will be lost.
For example: Joan had pension benefits worth £3m at A-day, giving her a primary protection factor of one (one extra LTA). In 2017 her benefits had grown to £5m and when she divorced, her husband was awarded a 50 per cent pension sharing order worth £2.5m.
Joan loses her primary protection because when the £2.5m is taken from the original protected amount of £3m, it only leaves £500,000.
It is possible to lose enhanced protection (EP) if any of the following occur after 6 April 2006:
• Relevant benefit accrual under a registered pension scheme;
• Impermissible transfer from an arrangement;
• A transfer of sums and assets that is not a permitted transfer;
• A new arrangement is opened other than in permitted circumstances;
• The member notifies HMRC that they no longer wish to be covered by enhanced protection.
Relevant benefit accrual under a money purchase pension scheme is simple: it is anything that is paid into the scheme as a relievable pension contribution. This includes any employer contributions and in some circumstances will include the payment of compensation into the pension scheme. Care needs to be taken when receiving compensation for any pension issues.